Blogs & Comment

Pounding the table on U.S. large caps

Several money mangers and strategists are pounding the table when it comes to U.S. large-cap stocks. Actually, they are jumping up and down on the table, screaming at the top of their lungs that U.S. stocks are a buy.
1. Larry Sarbit, CEO and chief investment officer for Sarbit Advisory Services, recently penned a clarion call, equating the current situation to the once-in-a-generation buying opportunity of 1982. He was amazed at the uniformity of aversion to U.S. stocks expressed by the advisers, planners and brokers on his recent road trip. The $33 billion (U.S.) in withdrawals year-to-date from U.S. stock market mutual funds was also a staggering contrarian buy signal, in his opinion.
In the early 2000s, Sarbit went mostly into cash (as high as 90% at times over the past decade) because he couldnt find wonderful businesses at bargain prices. He is now 70% invested and still buying.
2. Murray Leith, research director at Odlum Brown in Vancouver, says many U.S. blue chips offer good value. They have seen their price-earnings multiples contract over the past decade even though profits and dividends continued to grow. For example, Wal Marts stock price ( XMT) is down more than 20% over the ten years to 2009 despite earnings nearly tripling and the dividend increasing more than fivefold.
3. Bill Miller of Legg Masonalso thinks U.S. large cap stocks represent an once-in-a-lifetime opportunity to buy the best quality companies in the world at bargain prices. The last time they were this cheap was in 1951, he said in his July commentary.
He gives the example of Exxon Mobil ( XOM). Its share price is trading lower than during the depths of the last bear market, it has a yield greater than the 10-year treasury note, trades at a multiple well below the market, has returns on capital above the market, has grown the dividend over 9% per year the past 5 years, and uses its prodigious free cash flow to shrink its shares outstanding by between 300 and 400 million shares per year.
4. U.S. large caps are even greater bargains to Canadians. Over the past year of so, the Canadian dollar has appreciated by about 15% against the U.S. buck, which effectively lops 15% off the price of U.S. stocks to Canadian investors.
5. The SPDR Dow Jones Industrial Average ETF ( DIA) would seem to offer a quick and easy way to gain exposure to large-cap U.S. stocks. Its annual expense ratio is listed at0.167% and the dividend yield is quoted at 2.9%.
Perhaps its time to tell fear and panic to take a hike— especially ifSeptember and October live up to their reputation as among the worse months for stocks? And maybe its time to rebalance toward U.S. equities?